Regulating the U.S. financial markets is an increasingly difficult task for the Securities and Exchange Commission and other regulators. Not only must the commission enforce the rules currently on the books, it must also respond to new crises that may be threatening the safety and confidence of the market.

On May 6, 2010, the Dow Jones Industrial Average plunged nearly 1000 points, or around 10 percent, in a matter of minutes, then quickly recover about two-thirds of the move, in what has since been referred to as the “flash crash.”

SEC Rule 15c3-5 (“Market Access Rule”), finalized in November 2010, is the commission’s response to the flash crash. The rule places risk management controls on any broker-dealer that offers direct trading access. Such controls are designed to prevent the entry of orders that exceed appropriate pre-set credit or capital thresholds, or that appear to be erroneous. The rule also requires broker-dealers to establish, document and maintain a system for reviewing its risk controls.

Though compliance with the rule has been required since November 2011, firms still have lingering questions about the adequacy of their self-policing programs. Julie Dixon, managing principal at Titan Regulation, discusses the origins of the Market Access Rule and how it affects buy side firms and their trading activity. She also offers advice on how hedge funds and broker-dealers can be sure their programs are compliant, and what a firm may expect during a regulatory audit of its risk systems. She closes with a look at the “new breed” of market disruptions and how the Market Access rule may evolve in the coming years.

Market Access Rule Resources

  • SEC Final Rule: Risk Management Controls for Brokers or Dealers with Market Access on MarketsReformWiki (link)
  • SEC Open Meeting, November 3, 2010 on MarketsReformWiki (link)
  •  Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues on MarketsReformWiki (link)

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